Tuesday, June 29, 2010

Until the last decade or so, Chinese people ate few processed, packaged foods. The general culinary practice is to buy fresh vegetables and meat and cook everything from scratch. Since the late 1990s, supermarkets have displaced small vendors and processed foods have crept into the Chinese diet. These foods include many additives: colorings, preservatives, flavorings, binders, etc. that are chemicals. At the same time, Chinese factories have become major suppliers of many food additives for the entire world.

On June 24, The Peoples Daily carried an opinion article entitled, "Am I eating food or additives?" that is an indicator of this new food trend and perhaps a sign of the maturation of food safety regulation. The article appears to be calculated to make consumers aware of additives, to publicize new regulations and order local officials to implement them.

"This month, some government departments formally implemented 'Food additive production supervision management regulations' that cover food additive production, marketing, and use. Consumers have noticed that a sausage can have 11 kinds of additives, a small jelly can contain 14…how can food contain so many additives, am I eating food or additives?"

"You can’t blame the consumer for being worried about what’s added to food. There has been a series of scandals: melamine in milk powder, clenbuterol in pork, malachite green in fish…these things were all added illegally. Now there are lots of legal additives in food and people are concerned about whether they are harmful."

"Experts say food additives are not bad. Their regulated use is not harmful. Manufacturers say additives improve the appearance, taste, and sale of products. The problem is that many merchants add too many “profit-making additives”; for example, flavoring and thickening agents are added to milk and it’s sold as 'pure milk'; flavoring and soy protein are added to sausage and it’s called 'pure meat without starch'; orange juice is made without oranges using flavoring, pigment and sour agent and called '100% fruit juice.' It’s not just small businesses engaged in this; it’s also large companies. Many foods' color, smell, and flavor become 'artificially manufactured,' not only misleading the consumer, but also harming the common people’s health."

"Food package labels showing additives are undoubtedly a good thing. But just showing the names is not enough. Government departments should give the public specialized information. Most consumers are not experts and don’t understand these additives. Let consumers understand these chemical names and know what ingredients are necessary, which ones are harmful, which ones are forbidden. Then consumers can make rational choices and be scientific consumers."

"Food safety involves agriculture, health, inspection and quarantine, industrial and commercial, food and drug departments. The absence of any one could break the line of defense. Government departments must be coordinated, increase food oversight, and need to improve the standards system for conscientious companies to create a good market atmosphere."

"Eat healthy, eat without worries: this is not too much for consumers to ask. Reduce unnecessary additives!"

Monday, June 28, 2010

Last year China began a campaign to increase rural consumption by giving subsidies or rebates for purchases of appliances like washing machines, refrigerators, TVs, cell phones, water heaters, and air conditioners. The subsidy is about equal to the value-added tax, so the government is basically waiving tax on products to encourage purchases. The program is now a central part of the government's new coordinated development strategy which emphasizes expanding consumption.

A big challenge is to encourage rural people to buy things they can't afford--just like Americans. In Jiangxi Province lack of cash proved to be an obstacle for rural people who want to purchase appliances. Many of them had spent their cash on farm inputs or fixing up their houses. The provincial commerce department enlisted the rural credit cooperatives to earmark "consumer loans" for purchases through the "home appliances down to the countryside" program. In selected districts, rural households who have a credit rating can get a microloan at a preferential rate of 10%, for no more than 50% of the purchase price, capped at 20,000 yuan and no more than a 2-year loan period.

The program is still small. Last year, 793 households in the province got loans totaling less than US$1.2 million. Most of the loans were in one county--Xiushui county, which is designated as a "poverty county" where the average per capita income is the equivalent of 2,557 yuan ($375) a year. The manager of the credit cooperative says credit managers in their network of cooperatives have a consultation program with rural families to implement the loans. A farmer can go to the market and ask the salesman about credit for appliances he wants to buy.

In one market they claim sales went up to 7 million yuan last year (a little over $1 million) from 3 million yuan the previous year. They were able to build a new 4-story building for the market. The manager claims that most purchasers are raising fish and aquaculture sales are good now. He says all the loans were paid off in February. So Chinese farmers are not quite addicted to debt like Americans are...

There are ongoing complaints that farmers can't get credit; however a rural credit cooperative manager says that the loan business for traditional farm inputs like fertilizer and seed is stagnant. He thinks credit cooperatives can invigorate their business by focusing on consumer loans for houses, cars, and appliances.

Actually, there are other obstacles to appliance purchases. A survey by the Jiangxi commerce bureau showed that the most common reason for not buying washing machines or water heaters is lack of running water. They don't buy TVs and cell phones because there's no signal. Other reasons are expensive electricity (air conditioners) and expensive or inconvenient repairs--especially important if you're buying poor quality items that break down a week after you buy them.

Sunday, June 27, 2010

The Ministry of Commerce announced a crackdown on livestock and poultry slaughter to assure the public that meat is safe. The crackdown reflects widespread problems and public concern about meat quality and safety. Reports of underground slaughter, sale of meat from sick or dead animals, adulteration of meat with clenbuterol, lax inspection, faked licenses, and pumping pigs with water have been chronicled on this blog and I have other reports I haven't posted yet.

The livestock and poultry slaughter quality and safety remediation program, beginning this month and running until December, was announced jointly by the Ministries of Commerce, Agriculture, Public Security Bureau, Industry and Commerce Bureau, Food and Drug Administration, and Agency for Quarantine and Inspection.

The remediation program identifies several areas for attention. The first is the slaughter and sale of sick and dead animals. Other matters include the use of clenbuterol and other harmful substances in animals slaughtered and pumping water or other substances into animals prior to slaughter.

Another big emphasis is to crack down on slaughter by underground slaughterhouses. There is a network of approved slaughterhouses, but many animals are actually slaughtered by small butchers, and some of them borrow, rent, or forge licenses, signs and certificates of officially-sanctioned slaughterhouses. The remediation program will crack down on these practices, conduct regional inspections, and revoke licenses of companies they catch.

The program aims to tighten control and inspection of the entire chain from farm to restaurant to ensure quality. Make sure inspectors check up on equipment, procedures, quality and health of animals entering the slaughterhouse, and quality and safety of products coming out the other end. Restaurants and merchants are supposed to use invoices, establish record systems, and be able to identify the slaughterhouse meat came from.

A Ministry of Agriculture seminar on "low carbon agriculture" held in Beijing on June 18 painted a scary scenario of diseases, pest infestations, water shortages, and desertification disasters. They warn that agriculture is not only a source of greenhouse gas emissions but is also one of the most vulnerable industries to climate change. According to the report, "If measures are not taken, crop production could be reduced by 5%-10% by 2030."

According to experts, China faces a "grim, heavy task" to reduce greenhouse emissions and move to a more sustainable development path while facing pressures to reduce poverty and develop the economy. Typically, the conference raised a wide-ranging menu of tasks and objectives. They plan to reduce greenhouse gas emissions from agriculture, increase carbon sequestration, switch from fossil to renewable energy, improve irrigation, overhaul crop-breeding. They want to reduce methane and nitrous oxide emissions from livestock, get farmers to use energy-saving stoves and kangs (heated beds), take animals off pastures to reduce overgrazing, build fermentation tanks to produce cooking and heating gas from animal manure, use more crop straw for energy, build small hydroelectric facilities, and build irrigation infrastructure.

Here are the climate change measures listed in the article:1. A special “Agricultural Climate Change Action Program.” 2. Organization and implementation of the rural biogas, solar energy, wind energy, hydroelectricity, firewood- and coal-conserving stoves, "ecological home" actions.3. A national fertilization activity, already in use on over 1 billion mu. 4. Spread conservation tillage, healthy/standardized animal raising zones, reduce methane emissions, increase soil organic matter. At the same time implement conservation of basic agricultural fields, stabilize planted area, raise land quality, enhanced capacity to reduce risks to strengthen general production capacity for grain. 5. Focus on avoiding and mitigating disasters and general production capacity, begin field water management construction, increase irrigated area, raise efficiency of irrigation, raise irrigation and drainage capacity. 6. Breed and disseminate varieties that are resistant to drought, waterlogging, high temperatures, pests and diseases, raise the quality of breeds and increase their coverage. 7. Spread water-conserving technology; help areas that have problems with rural drinking water and agricultural production water use; raise capacity to respond to droughts.

Chinese agricultural officials may secretly be extremely pleased that they have a great excuse to rev up their central planning machine and roll out dozens of programs designed to re-engineer agriculture, build things, and push small farmers out of agriculture in favor of big, easily-controlled companies. It will require massive intervention, thousands of subsidy payments and demonstration programs, and support for companies to achieve the wide-ranging objectives they have set up.

Many of the problems they are trying to address do not result from climate change. China had floods, droughts, and other natural disasters long before anyone dreamed up "climate change." Most of the problems are the result of trying to produce too much on a skimpy resource base. Yet the report on the seminar adds the more important "party line" that we must not neglect to "stabilize planted area of grain" [which means don't let farmers reduce grain plantings] and "raise the general production capacity for grain."

The author answers his own question: "They're waiting for other people to quit."

He thinks that there have been some fundamental changes in the industry. He suggests that hog farmers have changed their "thinking." The cyclical nature of the industry is now widely understood, so farmers think "happy days" are just around the corner. They just have to wait it out and the industry will recover.

Another change is the entry of large-scale farms. He argues that these farms have sunk a lot of money into their farms and don't want to quit and "lose everything." The big farms, he says, have better access to funds, "better relations" (guanxi), and government subsidies, so they can wait out the losses.

The trouble is, if everybody waits out the losses, there is no way for oversupply to be relieved. The inclination is to see this as "market failure" that needs government intervention, but it may actually be "government failure" from intervention during 2007-08 when there was a shortage--see "government subsidies" and "better relations" and, for that matter, access to funding (favorable access to bank loans).

The author concludes, "It's hard to forecast how this will end up."

"One thing's for sure," he says, "The end will be sorry for many people...debts, bankruptcy, and a lifetime of paying it off."

Sunday, June 20, 2010

China has seen a wave a new large-scale pig farms operated by companies since 2007 when the government rolled out a series of policies and subsidy programs to encourage the sector to recover from a shortfall of pork that year and to re-engineer the hog sector into a "modern" industry.

Every pig creates a lot of waste. A 220-lb finishing hog eats 650-800lbs of feed and probably lots more water over 5-to-6 months. If only 220 lbs of that feed stays in the hog's body (as added weight), that means 430-780 lbs of feed (and lots of urine) comes out the other end in the form of manure and has to go somewhere. Water pollution observed by the reporter.

A reporter in Changchun City, of Jilin Province went to a village on the outskirts of the city to investigate the hog pollution problem. Some villagers complained that the stream running through their village had turned black, was full of foreign matter, and emitted an obnoxious odor. One villager blamed the dirty water for bringing pig manure and antibiotics and other stuff into his fish pond, killing off his fish in April. One lady tending a cow claimed that water gushing forth from numerous springs in their village used to be crystal clear and used for drinking and washing clothes, but now they can't even give the water to their cattle. They have to give them well water. Some onlookers watching the interview agreed, saying that even chickens and ducks don't dare go near the water now.

The reporter was led to a spring. He saw that the water was clear when it came out of the spring, but after 5 meters it flowed into a dirty creek.

The village has two large hog farms, both started by investors in 2008. They are operated by companies: the Jilin Province Hou De Trading Co. pig breeding base and the Jilin Province Yibang Animal Husbandry Technology Ltd. Co.

The manager of the Houde company said they had started raising hogs in April 2008, and now have 13 barns. Of those, 4 are empty, 6 are "ecological" barns that don't produce waste, and 5 are common barns. The company has built a manure treatment lagoon using matching funds from the government, and the farm has approval from the environmental protection bureau although he didn't have anything to show the reporter. He claims the waste doesn't affect the village's water supply. But the manager admits the treatment system is "not perfect" and they don't know where the water actually goes.

The manager of the neighboring Yibang company shows the reporter their environmental assessment and assures him they have approvals from various government departments. This company has built an underground waste treatment pit with government matching funds. The Yibang manager insists that the waste from their farm does no harm to the village. However, he also mentions the company is waiting for more government funds to arrive so they can make further waste treatment improvements. He says the stream going through the village is mostly dry and only fills up when there is a heavy rain in the mountains. The Yibang manager says fish farmers use the pig manure as fish feed. He insists that the farmers that complained to the reporter must have "ulterior motives."

The village communist party secretary also supports the farms. He points out that there used to be 10 farmers raising pigs plus other kinds of livestock and poultry, and they all dumped their waste in the stream. Everybody gets their water from 10-meter deep wells. He attributes the worsening water quality in the stream over recent years to "climate change." He also insists the big hog farms have no negative effects on villagers and points out that the farms contribute a lot to the local economy.

From June 11 to 13, officials in Laibin City, Wuxuan County of Guangxi Province, received complaints from villagers about dead pigs found in rivers and fish ponds. Government workers disposed of 821 carcasses pulled out of bodies of water. Environmental officials are monitoring the potability of the local water supply. Officials from the health, environmental, and disease control bureaus are looking into the matter.

Friday, June 18, 2010

The Ministry of Agriculture announced that the central government will spend 990 million yuan ($144 million) in special funds for national livestock and poultry breed improvement in 2010. Funds will be allocated mostly to swine (650 million yuan) and dairy cattle (260 million) breed improvement, but the program has been expanded to beef cattle (20 million) and sheep (60 million).

The dairy breed subsidy was started in 2005. Over the program's five years the dairy breed improvement program has allocated a cumulative total of 715 million yuan covering 24.8 million cattle in four pilot provinces. It is credited with increasing milk production per cow by 568 kg. and raising incomes for 2.7 million farmers.

Since the hog breed subsidy was started in 2007 its funding has increased from 180 million yuan to 650 million yuan, and coverage was expanded from 200 counties to 400 counties.

In the case of hogs, the program subsidizes artificial inseminations of sows using semen of boars from improved breeds. Each insemination is subsidized at 10 yuan ($1.46), and one sow can receive up to four per year (two per pregnancy, two pregnancies per year). Boars are from an approved list that includes "foreign" breeds like Duroc, Landrace, and Yorkshire that grow faster and produce lean meat. The program standardizes breeds and reduces the number of boars that need to be maintained. However, Chinese consumers say they don't like the meat from "improved" breeds and some say the foreign breeds are not hardy enough to tolerate harsh conditions on Chinese farms, which contributes to the spread of epidemics. Then there's the potential loss of genetic diversity--China is home to dozens of different pig breeds.

Thursday, June 17, 2010

A 2009 U.S. appropriations bill contained language forbidding USDA from spending any funds to facilitate import of Chinese poultry to the United States. USDA had previously conducted a series of inspections of Chinese poultry plants and concluded that the plants had adequate safety measures in place and could export processed poultry products from a handful of approved plants to the United States. (The poultry meat however could not come from China; it would have to be imported from a country certified to be free of disease issues.)

The appropriations bill blocked the implementation of USDA's approval by refusing to allow any funds to be spent to facilitate import of Chinese poultry. China complained to the World Trade Organization about the restriction in the appropriations bill and an article appearing on many Chinese news sites today says that the WTO found in favor of China.

Sources say that on June 16 China won its case against U.S. limits on poultry. This is the first time China challenged U.S. legislation and its first successful challenge. Experts here said it was significant, “U.S. Congress cannot just act arbitrarily.”

Yesterday, an interim report on China’s WTO challenge of U.S. poultry limitations was released. The report found U.S. limits on poultry to be in violation of WTO rules related to plant and animal quarantine. It also was found to violate WTO most favored nation provisions and elimination of quantitative restrictions.

The U.S. limitation on Chinese poultry was in the 2009 appropriations law which forbade government spending to implement regulations facilitating import of Chinese poultry, which amounts to a ban on Chinese poultry that is still in place. On April 17, 2009, China took the dispute to the WTO for resolution.

The case is now in the experts’ evaluation stage, if the U.S. refuses to accept the finding, it can appeal. If U.S. does not appeal, the experts group report will be become final.

U.S. Congressmen often find fault with the trade policies of other countries, making irresponsible remarks accusing them of violating WTO rules, even advancing some ridiculous measures, intervening in other countries’ internal affairs. Experts here said that WTO challenges to US laws are common, but few are successful. China’s complete victory on its first challenge of U.S. law is very rare.

Tuesday, June 15, 2010

The industry is grappling with chronic excess capacity problems that have been especially pronounced since 2007. This year problems are compounded by slow demand due to droughts and other natural disasters in China and weak global demand.

The article moans, "The phenomenon of supply exceeding demand is hard to change in the short run. Everyone knows there is excess capacity but manufacturers keep adding new projects." A similar article that appeared in January says the industry has to face up to four words: "供大于求" ("supply greater than demand").

The article adds, "...and there is no clear increase in world demand, so the excess capacity situation has become more and more serious." Translation: we can't export our way out of this problem.

Prices keep going down and companies are losing money. The worst case is urea, where companies lose 200 yuan per ton. "In the second half of the year there’s not much hope of a price rise, the market will stay at a low point."

The article speaks of "a crisis of confidence," "panic," "depression." "Distribution companies face a serious test, this year could face system-wide industry-wide losses. The market crisis induced panic is hard to heal in the short run. Presently, distributors bosses generally are in a confidence crisis. They could ask themselves, 'Can fertilizer operations hold on?' The industry 'depression' is hard to change."

Some companies are facing a cash flow crisis. "The situation is not good for the fertilizer industry development, and moreover it could give foreign competitors a chance to take advantage."

The situation is said to be good for farmers (presumably because fertilizer prices are going down) but bad for companies.

Since 2006 China has been giving farmers a "comprehensive input subsidy" ostensibly to offset rising energy and fertilizer prices. There has also been a related series of announcements and reforms directed at the system of supply and marketing cooperatives (the anachronistic input supply system holdover from central planning days) over the past year, another sign of trouble in the input supply industry.

The input subsidy program is now set up so that the subsidy automatically increases when input prices rise, but it does not go down when input prices fall. (So now farmers get the subsidy and cheap fertilizer!) The input subsidy now constitutes the major part of farm subsidies in China. In light of this article, one wonders whether the subsidies are really for the farmers, or are they actually a means to prop up fertilizer companies?

Friday, June 11, 2010

An article from Daily Economic News gives us a glimpse of the vicious competition in Chinese industry and how China's attempts to stimulate rural demand and "go green" play out in actuality. A whiff of cash draws Chinese entrepreneurs out of the woodwork. Before you know it, heated (no pun intended) competition drives prices down and profits disappear.

The article focuses on solar-powered water heaters. These are metal tanks with a series of tubes that sit on the roof of a building to heat up water for household use. They are popular in villages and in cities among folks who want to lower their electricity bills. And, of course, they are a sign that China is a "green" energy-saving country. An ad for solar-powered water heaters aimed at villagers in Guizhou Province.

The government has pulled solar water heaters on to the bandwagon. They fit in nicely with the program of "building a new socialist countryside," so many villages have been designated as "solar water heater model villages" where villagers get subsidies to buy the heaters. In China's stimulus plan to promote rural consumption by "sending appliances down to the countryside," solar water heaters were added to the list of eligible products that could be bought with subsidies by rural consumers.

The article reveals that this flourishing market has attracted over 6000 companies making low-tech products, often with low-quality materials. With so many companies making similar products, it's hard to distinguish among brands, so companies have to engage in price wars to move their products. With prices scraping bottom, profits have vanished and many are quitting the industry.

The article takes the reader to a small street in Laohekou, a small city in northern Hubei Province. A sign on the second floor of a small building advertises "Fei yang" (flying sun) solar-powered water heaters. The small company's glum proprietor, Chen Yang, tells the reporter that the company has already shut down, less than 2 years after starting up.

Solar-powered water heaters work on a relatively simple principle, utilizing heat from the sun to raise the temperature of water. According to the article you can get into the business easily with a 10,000-yuan ($1400) investment in equipment and 3-to-5 people, "although the quality may not be that good." The low threshold for entering the industry allowed lots of companies to enter, and many of the workshop-style businesses were like “contract shoe manufacturers.”

As in many other industries in China, small companies churn out generic products and rely on price-cutting to compete. Many small companies churn out poor quality products. According to the article, "Some solar water heaters leak, don’t hold water, have weak pressure, or other quality problems. The reporter understands that there is a high rate of complaints, with some consumers complaining their units start leaking within a week after buying them."

The industry is described as a "mixed bag" ("dragons and fish"). It includes big companies like Haier [added June 13: I noticed Yingli Green Energy, another "dragon" company selling solar energy equipment based in Baoding, Hebei Province, had prominent advertising on the field sign boards in this weekend's World Cup soccer games], but 80% of the companies are "fish"--medium and small businesses. There are 171 companies on the list approved to sell in the "down to the countryside" subsidy program. Thousands are not even registered with commercial bureaus. There is no licensing and no strong third-party certification. The industry association formulated a standard, but there is no national government standard.Tongling "World Flower Garden" in Anhui Province, a "model" project.

In the Laohekou City “Solar Energy Contract Production Base” the reporter saw a workshop of less than 40 square meters with all kinds of solar-powered water heaters in various states of assembly. A couple of simple machines were in the middle of the floor. Outside there were several pieces of equipment with the company’s emblem ready for sale. The company makes solar water heaters according to the specifications of various customers.

The reporter noticed that these solar water heaters had no production date, nor the name of the factory. There was no quality certification, just a name to distinguish it from other brands. The base price is 180 yuan and it’s lower if you buy in quantity.

Solar energy companies have increased in number at an alarming rate. Nationally production is increasing by 30% each year. In one city, Yixing in Zhejiang, there are over 300 solar heating companies. 100 new production lines for collector tubes were added. Even in a small city like Laohekou, there are 7 or 8 companies. One company, Huangming Solar Energy Corporation LLC, expanded its production area to equal the entire capacity in Europe and twice that in North America.

China is estimated to account for 70% of world production of solar water heaters. The article complains that China is not as green as its massive solar water heater production might suggest. Apart from water heaters, solar power applications include solar-powered street lights, air conditioners, lights, and buildings. However, "...the embarrassing reality is that water heaters are the only solar-powered equipment commonly in use."

The article reports, "Solar electricity generation accounts for less than 2% of power, far behind developed countries."

The article continues, "Most companies only can enter the low-threshold, low-tech equipment market, building up capacity with thousands of companies crowded in a small space."

An industry official said, “Actually, it would be a good thing for these small companies to shut down.” What China would like to have more of.

Wednesday, June 9, 2010

Hog farmers in China are squeezed by falling hog prices and rising corn prices. Several years ago hog prices were shooting skyward with seemingly no return to earth possible. Now they keep plunging downward.

On June 7, a farmer in Shandong's Shanghe County told a reporter, "This month the hog price is down to 5 yuan per jin. If it goes any lower I will start cutting my hog inventory."

A spokes person from the Jinan Price Bureau said the average price was down to 4.95 yuan, a decline of 24% from the previous month.

The price fell below the breakeven point in March, so hog farmers have been in loss territory for 2 months.

Facing these losses, some farmers are cutting their herds to stem losses. One farmer in Shanghe County who has 1,000 hogs said he has cut back his herd by 20% since last year at this time, especially sows. Another farmer told the reporter over the phone that he had cut back 30%.

One factor is that summer is the low season for pork consumption. Another is rising feed costs. The Jinan Price Bureau said that feed for finishing hogs is up 8.3% from last year at this time. The price for feeder pig feed is up 9%. Corn constitutes at least 60% of hog feed, and feed accounts for 60% of hog production costs. Corn's price is up 30% from last year, according to the Jinan Price Bureau.

Monday, June 7, 2010

Fisheries officials from Brazil and Namibia each visited China this week, a reminder that China is eager to strengthen relations with Africa and Latin America. Which country rates the bigger welcome?

The Namibians meet the Vice Minister in the plush MOA meeting room.

The head of Namibia's fisheries and ocean resources department visited China's Ministry of Agriculture on June 7, and vice-minister Niu Dun met with him. In the meeting, Vice-Minister Niu expressed an eagerness to form long-term cooperative relations with Namibia. Niu recommended that as soon as possible the two countries sign a memorandum of understanding that would set up a framework for cooperation in fisheries, with lots of funding and also as soon as possible sign an agreement on animal health and disease that would facilitate trade. The two sides should continue exchange of personnel for training and promote investment in fisheries enterprises.

The Brazilians at the fisheries research institute.

The head of Brazil's fisheries department visited Beijing on June 3. He, his delegation and personnel from the embassy only rated a visit to the fisheries research institute and its director. Apparently, the Brazilians have an ongoing relationship with the institute.

The warm welcome extended to the Namibian official reflects China's eagerness to build ties with Africa. Fishing is one of the industries targeted by China's "going out" as a channel for foreign investment.

Thursday, June 3, 2010

No one really knows exactly what is driving China's corn prices higher. A couple of articles appearing on financial news web sites seem to agree that the rate of increase in prices is faster than supply-demand conditions warrant and prices could come down in coming months.

"Corn Gone Crazy" appeared on dozens of financial sites this week and suggests that the government auctions of corn reserves are being used to drive up prices. Warehouses holding grain reserves are identified as possible speculators. Another article, "Corn Faces Seasonal Decline in June," also points to speculative forces putting froth in corn prices and suggests that the withdrawal of "hot money" from the market and seasonal effects could lead to a reversal of prices this month.

The articles agree that the supply and demand situation doesn't seem to warrant such rapid increases in prices. The "Crazy" article points out that the first official corn production statistic of 164 million metric tons announced in a market information bulletin this week indicates a much smaller decrease in production than 140-mmt estimates that are common among market analysts. The reporter says that local people in the drought-stricken northeast last fall told him production was down 20-30% in Jilin Province, one of the chief production areas. A processor in Shanghai told the reporter, "Production must have fallen 15-20% last year and it was down 30% in some areas."

Despite the fall in production, the reporter was told corn reserves are still huge. One grain industry analyst claims that after four years of large grain purchases, corn stocks are at least 120 mmt at the end of April [??? not sure how valid this number is]. Government reserves are said to be at least 40 mmt.

Moreover, demand does not seem to be that strong. Feed use accounts for 70% of corn demand, and meat production is still in the doldrums. Hog producers are experiencing losses despite three rounds of government pork purchases in the last two months.

The "Crazy" article focuses on speculation by companies that store grain, but the details are very hazy. People in northeastern China told the reporter that about 70-80% of the corn harvest has been going into grain warehouses in recent years (usually 70-80% goes into the market). Large numbers of small warehouses have been contracted by Sinograin (the State grain reserve management company) to hold grain for them. Processors complain that they are unable to purchase enough grain to keep their operations going because there has been so little grain entering the market. The big storage was to support grain prices, especially during 2008/09 when 36 mmt of provisional grain reserve purchases were carried out in the northeast. (Japonica rice is also stored up in large quantities and experiencing a similar rise in prices.)

The details are hazy, but the article seems to be accusing holders of corn reserves of gaming the grain auction system to drive up the price of corn. Industrial processors are excluded from the auctions. Feed mills still have weak demand for their products. The author implies that the corn sold at the government auctions is being bought for speculation (although the rules are set up to prevent this). The reporter was unable to get a confirmation of this explanation from Sinograin. Private grain traders in the northeast denied they were speculating on grain.

The "Seasonal Decline" article suggests that the crackdown on speculation announced last week could drive "hot money" out of the corn market. This article says that farmers are still holding a lot of corn with high moisture that they will have to sell soon [before it gets moldy]. The author also claims that historically China's corn futures prices peak in May, so there is reason to expect prices to fall as the summer lull in meat/feed demand sets in.

The article entitled, "Alert! American Pork's 'soybean appetite,'" warns that the resumption of U.S. pork sales to China announced last month, a year after the H1N1-related ban was put in place, is a dangerous prospect that could "eat up" the Chinese hog industry.

An analyst with Beijing Orient advisory services Co. in Beijing warned readers to "be careful of the trap set by Americans." The analyst says it's wrong to think that U.S. imports of as much as 100,000 metric tons will have little impact on a market where demand totals a massive 50 million metric tons annually. He said, "If U.S. pork imports are not limited, [the pork industry] is likely to repeat the mistakes of the soybean industry with disastrous consequences."

But the situation changed in 2008. To ease upward pressure on prices, the Ministry of Finance reduced the tariff on frozen pork imports from 12% to 6% for several months. "This invited a lot of imports."

A farmer in Hebei explains: “Actually, in 2007 meat prices went up a lot, and the government imported some pork from the United States. It was said the U.S. built a lot of pig farms and some companies came to China to operate farms."

The reporter visited a village in the Tongzhou district of Beijing where he found an elderly lady named Ms. Chen who has plenty to complain about. She frets that "Other people [presumably Americans] have lower production costs than us, and their formula lets their hogs grow faster, so we don't have a competitive advantage." She thinks imports would reduce their price.

The concept is that Chinese farming is "in its early stages" and small scale farmers can't compete with large-scale farmers from overseas. The article calls for the government to "form a policy to protect hog production," and it quotes several analysts and farmers calling for more direct subsidies to farmers, control of production costs, and guaranteed profit. One calls for utilizing the WTO's trade relief measures to prevent a large influx of pork imports.

Sounds like the "infant industry" argument used to justify protection of industries in the 20th century. None of the infant industries ever grew up behind their wall of protection.

Some points the article fails to get:1. The government has been giving out subsidies and trying to put a floor under prices for several years. THis encouraged more domestic investment in hog farming, and this is the main reason prices have been pushed down below the breakeven point this year.2. The government has been pursuing a policy of supporting and subsidizing grain production to guarantee farmers can cover costs. This has helped raise feed costs for pork producers, erasing their profits.3. The pork industry is one of the chief beneficiaries of the cheap soybean imports reviled in the article. The influx of soymeal protein (that China could not produce herself) lowers feed costs and has sped up hog growth in China.

According to Peng, drought and low temperature at the beginning of the year set off rises in japonica rice and vegetable prices. Then medicinal herbs started rising in March and April. At the end of April and early May garlic and bean prices started rising a lot. The retail price for dried garlic reached 8 yuan per jin, and mung beans are over 10 yuan in some supermarkets. In May, new garlic came on the market and the price already started falling. Now the new garlic price is already down to 2 yuan per jin. (Yesterday's post on this blog shows that the garlic situation is more complicated than portrayed by Peng.)

Peng said there was also some investment capital going into markets for garlic and mung beans--products where the production is geographically concentrated, seasonal, production has fallen, and market information is inaccurate. There was malicious hoarding and driving up of prices, disrupting market order.

Peng pointed out the last year banks gave out over 9 trillion yuan in loans. Real estate prices and stock markets went up, and a lot of money went into those markets. This year the state issued some policies to contain the growth in real estate prices and the stock market fell. In this situation a lot of money migrated into some agricultural markets.

Acording to the Xinhua report, the government is worried that the soaring prices for a few commodities will have a "demonstration effect," raising inflationary expectations and putting upward pressure on prices of other commodities.

In the interview, Peng warned, "Hoarding and spreading rumors are building inflationary expectations, adding fuel to the fire."